A letter from 15 trade federations has been sent to Sajid Javid MP, the chancellor of the Exchequer, asking for the 1 October 2019 introduction of domestic reverse charge VAT to be delayed until April 2020.

Reverse charge VAT means that the customer receiving the service will have to pay the VAT to HMRC instead of paying the supplier. The reverse charge applies through the supply chain where payments are required to be reported through the Construction Industry Scheme. Making the payment of VAT the responsibility of the customer rather than the supplier, there is no opportunity for the supplier to avoid paying VAT.

The National Federation of Builders, together with the other trade federations, has highlighted the effect the change will have on cash flow and administration costs for an industry already facing increased material and labour costs.

The guidance issued by HMRC was delivered late, is not clear and leaves some questions unanswered. A delay before introducing the charge would give the industry and government time to properly prepare the industry to understand the changes and update systems.

Richard Beresford, chief executive of the National Federation of Builders, said “For an industry facing lighter workloads, increasing pressure on cash flow and an already high rate of insolvency, reverse charge VAT could not have come at a worse time. By delaying the introduction of this measure, the industry will have more time to properly prepare and make their businesses more resilient, and more detailed guidance can be provided to ensure a smooth introduction.”

The Government has not properly prepared the construction industry for major VAT changes coming in October and needs to delay their implementation to avoid chaos, the Federation of Master Builders (FMB) has said in a letter to the Financial Secretary to the Treasury.

New data published by the FMB shows that:

  • Over two-thirds of construction SMEs (69%) have not even heard of reverse charge VAT; and
  • Of those who have, more than two-thirds (67%) have not prepared for the changes

This comes after HMRC published guidance on reverse charge VAT just four months before the changes were due to come into place. This has been criticised for being inaccessible to most in the industry and is even contradictory in places. HMRC was also due to have a dedicated website and marketing campaign for the changes to help prepare the hundreds of thousands construction companies who will be impacted by the changes.

Reverse charge VAT will have a serious impact on cash flow, as well as being a significant administrative burden, fundamentally changing the way construction companies invoice their clients and pay their taxes to HMRC.

Brian Berry, Chief Executive of the FMB, said “Construction companies are already struggling with Brexit uncertainty, sky-rocketing material price rises and skill shortages and reverse charge VAT is yet another thing for them to deal with. What makes things worse is that HMRC has failed to deliver on its promise to help the industry to prepare. The guidance is not user-friendly and even tax experts are scratching their heads over it.”

“It’s therefore not surprising that the vast majority of construction SMEs are not aware of the impending changes, despite widespread promotion by the FMB. Small business owners are busy people and clearly they don’t have time to read everything we send them. For those who are aware, they haven’t had a chance to change their systems yet as they were waiting for guidance to be published that has only just emerged. That’s why we are calling on the Government to delay the changes by another six months and to use the extra time to improve the guidance and work with us to undertake a more intensive communications campaign. HMRC should also consider holding workshops across the country to explain the changes.”

Industry experts The Federation of Master Builders (FMB) are calling for the Government to cut the VAT on home improvement work following official data from the ONS. The information shows that whilst there a rise in output has been observed over the first quarter of 2019, construction output actually decreased month-on-month by 1.9% and the repair and maintenance series fell to its lowest level since December 2018, experiencing a fall of 3.1% compared to the previous month.

Speaking about this, Brian Berry, Chief Executive of the Federation of Master Builders, said “It’s not at all surprising that construction output has dropped at the end of the first quarter of this year, given the unprecedented political uncertainty we’ve been facing. To get us through these turbulent times, the Government must be bold in its thinking when it comes to supporting the economy bucking any downward turn. One course of action would be to cut VAT on work in the home improvement and private domestic sectors from 20% to 5%”

“A cut in VAT would help stimulate demand from homeowners resulting in more work for the thousands of small to medium-sized construction companies which would help support local economies and increase training opportunities. This is all the more important given that the FMB’s own State of Trade Survey for Q1 2019 saw the first dip in workloads for small builders in six years.”

“Cutting VAT would also be an important step to help encourage more retrofits of our existing buildings to make them more energy efficient and deliver a cut in carbon emissions.”

Plaid Cymru’s proposal to cut VAT on home renovations would spark a renaissance in the Welsh construction sector, the Federation of Master Builders (FMB) Cymru has said in response to the Party’s announcement.

Ifan Glyn, Director of FMB Cymru, said “We welcome the announcement that Plaid Cymru would press the UK Government to reduce the amount of VAT currently charged on domestic refurbishment work. The economic benefits of a VAT cut would be significant and timely, given the uncertainty facing the country as it starts the process of departing the EU. Research has demonstrated that cutting VAT on such work would provide an annual £50 million stimulus to the Welsh economy, revitalising a sector that has suffered decidedly mixed fortunes over the last decade. Far from depriving the treasury of revenue, experience from the Isle of Man suggests that the reduction could actually increase net revenues by boosting demand and cutting out the black market.”

“Moreover, it would provide a necessary shot in the arm in the effort to improve the energy efficiency of Welsh homes and help reduce our carbon emissions. Our housing stock is amongst the oldest in Europe, which is a major factor behind the generally poor levels of energy efficiency in our homes. A reduction in VAT would incentivise property owners into investing to improve the energy efficiency of their homes, thereby cutting energy bills. This could play a significant role in tackling fuel poverty, which remains a serious issue for Wales.”

“A tax stimulus could also yield further dividends in the form of empty homes being brought back into the market. There are currently 25,000 properties that are unoccupied in Wales and which could be fully inhabitable again if the incentive to renovate those homes existed. This would be equivalent to nearly two years’ worth of the supply of new homes that it is agreed Wales needs to tackle our housing crisis. Obviously, Plaid Cymru are in no position to win the General Election, but this policy highlights that a VAT reduction on home renovations is both feasible and highly desirable for the Welsh economy.”